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Kuby’s Commentary

The Bulls are Back

Feb 8, 2021

Last Week:

The Bulls are back, and I am not talking about the Chicago Bulls. The stock market rebounded from its brief slump to post its best weekly gains since November, with the S&P 500 bouncing 4.65%. Small cap stocks continued their recent surge, as the Russell 2000 soared 7.7%. The market advanced and the VIX (CBOE Volatility Index) declined all five trading days, the latter reaching its lowest level of 2021 while the former reached a record high. The narrative remained the same with optimism over vaccine developments and reduced COVID-19 cases, stimulus talks, and improved corporate earnings, overwhelming some soft economic data and elevated COVID-19 deaths. The soft January jobs report, which reflected barely any increase in employment, probably helps the case for swift passage of President Biden’s $1.9 trillion relief package. It is worth noting that there is no bipartisan support for this proposal, so one could anticipate a bumpy path to approval. The vaccine news does seem promising, with daily doses rising and additional vaccines from Johnson & Johnson and Novavax on the horizon. Meanwhile the U.S. approached 500,000 COVID-19 deaths, with the possibility of another spike following Super Bowl parties. Why have a party anyway? The Bears are not playing.

The most encouraging, and least reported on story, has been the fourth quarter earnings season, in which S&P 500 companies are dramatically beating EPS estimates. The index is now reporting year-over-year growth in earnings of 1.7% versus an expected decline of nearly 10% a month ago. If this trend holds, it will mark the first increase in corporate earnings since the fourth quarter of 2019. Expectations are for double-digit earnings growth throughout 2021.

As expected, the social media induced pump of troubled companies evolved into an institutional and insider dump of those shares. One example would be headphone manufacturer Koss Corp. (KOSS), a company we had invested in on the thesis that they would benefit from the significant increase in demand for their product category. We exited our position as the company fumbled while new competitors prospered. KOSS stock sank from double digits to a range of $2-$3, where it traded for almost seven years until two weeks ago. During that time frame the Company’s annual revenues dropped in half and cumulative net profits were negative. Fortunately for the Koss family, the stock got swept up in the recent mania and its shares traded over $100/share. In response, various insiders cashed into the tune of $45 million! That windfall came at the expense of misguided speculators.

Beware of rising rates! The yield on the Ten-Year Treasury jumped 8 basis points to 1.17%, its highest level since the pandemic hit. These rates can move swiftly higher, particularly if the economy does recover as expected. For those with short memories, look back to the fall of 2018 when the Ten-Year topped over 3.25% (also look where the S&P 500 was then).

The dollar continued its recent rebound, while gold moved slightly lower. We still think owning some gold makes sense in portfolios as we are unconvinced by the recent bounce in the dollar.

This Week:

The celebrities in our nation’s capital (otherwise known as Senators and Congressmen) will once again be dominating the headlines with Donald Trump’s second impeachment trial beginning on Tuesday, and stimulus negotiations continuing.

Earnings season enters its final third with 77 S&P 500 companies reporting results.

On the economic front, inflation data for January will be released on Wednesday, with expectations of a 1.5% year-over-year increase. We caution that an unexpected surge in inflation could disrupt the bond and stock markets. Thursday’s weekly initial claims for unemployment remains worth monitoring, as it provides a good short-term indicator of the jobs market. Consumer sentiment is another valuable gauge, as such we will be focusing on Friday’s University of Michigan Index.

Speaking of the University of Michigan, congratulations to famous Wolverines, Super Bowl MVP Tom Brady and North Star MVP Peter Gottlieb.

Stocks on the Move:

We had 21 double-digit gainers versus a single double-digit decliner.

Companies with news…

+21.7% CarParts.Com Inc (PRTS) retails automobile parts online. The Company offers mirrors, engines, headlights, brakes, interior and exterior accessories, tools, wheels, lighting, bumpers, and other aftermarket autobody parts in its network of over 1.2 million SKUs. Chief Executive Officer Lev Peker made a CNBC appearance on February 2nd, 2021, to discuss raising capital after benefitting from the focus on heavily shorted stocks. As of February 8th, 2021, the short interest of PRTS is around 35.9%. PRTS is a 5.9% holding in the North Star Micro Cap Fund.

+14.3% Alphabet Inc (GOOGL) operates as a holding company. The Company, through its subsidiaries, provides web-based search, advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce, and hardware products. Last week, Alphabet released Q4FY2020 earnings of $22.30 per share, which beat by $6.58, and revenue of $56.89B, which beat by $4B. GOOGL is a 2.7% holding in the North Star Opportunity Fund.

+14.6% KKR & Co Inc (KKR) operates as an investment firm. The Company manages investments such as private equity, energy, infrastructure, real estate, credit strategies, and hedge funds. Last week, KKR announced it was raising over $1B for a special purpose acquisition company. The platform will focus on the consumer retail industry. KKR is a 2.4% holding in the North Star Opportunity Fund.

+12.7% Superior Group of Companies Inc (SGC) designs apparel products. The Company manufactures and sells a wide range of uniforms, corporate identification, career apparel, and accessories. Super Group of Companies serves hospital and healthcare fields, hotels, fast food and other restaurants, public safety, industrial, transportation, and commercial markets. Last week, Super Uniform/Superior Group of Companies announced a $0.10/share quarterly dividend, in-line with previous payments. SGC is a 2.1% holding in the North Star Micro Cap Fund.

+10.6% Johnson Outdoors Inc (JOUT) designs, manufactures, and markets outdoor recreational products. The Company offers products including outdoor clothing, tents, canoes, compasses, sailboats, flotation devices, diving equipment, and motors. Last week, Johnson Outdoors announced FQ1 GAAP earnings of $1.96 per share, which beat by $1.07, and revenue of $165.7M, which beat by $20.3M. David Johnson, Chief Financial Officer, commented that the Company will continue to work hard to manage their current supply chain pressures and fill high demand. JOUT is a 4.4% holding in the North Star Micro Cap Fund.

And those without news…

-14.4% B&G Foods Inc (BGS) manufactures, sells, and distributes shelf-stable foods across North America. The Company’s brands include Green Giant, Ortega, Snackwell’s, Spice Islands, and many others. There was no significant company news last week. BGS is a 2.7% holding in the North Star Dividend Fund.

+10.3% Sprott Inc (SII) provides investment management services. The Company offers portfolio management, broker-dealer activities, and consulting services to clients. Its offerings primarily involve equity strategies, ETFs, and physical bullion trusts that give institutional and individual investors exposure to precious metals. There was no significant company news last week. SII is a 1.5% holding in the North Star Dividend Fund and 1.2% holding in the North Star Opportunity Fund.

+13.2% A.H. Belo Corporation (AHC) prints and publishes newspapers. The Company offers marketing solutions, niche publications, commercial printing, and direct mail services. There was no significant company news last week. AHC is a 1.2% holding in the North Star Dividend Fund.

+14.1% CatchMark Timber Trust (CTT) operates as a real estate investment trust. The Company engages in timberland ownership and management, which includes about 435,000 acres of such property, without ownership of any forest products and other manufacturing operations (logging/wood products). There was no significant company news last week. CTT is 1.0% holding in the North Star Dividend Fund.

+12.0% Douglas Dynamics Inc (PLOW) designs and manufactures snow and ice control equipment. The Company produces snowplows and sand and salt spreaders. There was no significant company news last week. PLOW is a 3.2% holding in the North Star Dividend Fund.

+11. 6% Trinity Industries Inc (TRN) manufactures transportation, construction, and industrial products. The Company’s products include tank and freight railcars, inland hopper and tank barges, highway guardrail and safety products, ready-mix concrete, and other products. There was no significant company news last week. TRN is a 1.2% holding in the North Star Dividend Fund.

+11.0% Weyco Group Inc (WEYS) imports and distributes men’s footwear, including mid-priced leather dress and casual shoes, sold under the Florsheim, Nunn Bush, and Stacy Adams brands. It also offers casual footwear for women and children under the BOGS and Rafters labels. There was no significant company news last week. WEYS is a 0.7% holding in the North Star Dividend Fund.

+13.0% Innovative Industrial Properties Inc (IIPR) owns and leases industrial real estate assets. The Company focuses on the acquisition, disposition, construction, development, and management of industrial facilities leased to tenants in the regulated medical-use cannabis industry. There was no significant company news last week. IIPR is 3.6% holding in the North Star Dividend Fund.

+12.5% ARC Document Solutions Inc (ARC) provides large format document reproduction and printing services, mainly to architectural, engineering, building operator, and construction firms. There was no significant company news last week. ARC is a 0.5% holding in the North Star Micro Cap Fund.

+22.0% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. There was no significant company news last week. CNTY is a 0.9% holding in the North Star Micro Cap Fund.

+14.2% Delta Apparel Inc (DLA) designs, markets, and manufactures branded and private label active and headwear apparel. The Company’s products are sold to boutiques, department stores, outdoor and sporting goods retailers, college bookstores, screen printers, and the US military. There was no significant company news last week. DLA is a 0.7% holding in the North Star Micro Cap Fund.

+10.7% Denny’s Corporation (DENN) operates as a full-service family restaurant chain directly and through franchises. The Company consists of more than 1,700 franchised, licensed, and company-operated restaurants around the world. There was no significant company news last week. DENN is a 1.8% holding in the North Star Micro Cap Fund.

+31.3% Lakeland Industries Inc (LAKE) manufactures and distributes protective work clothing. The Company offers disposable, chemical, cleanroom, hand, arm, fire, and heat protective clothing for on-the-job hazards, toxic-waste cleanup, and industrial work. There was no significant company news last week. LAKE is a 1.4% holding in the North Star Micro Cap Fund.

+15.5% Movado Group Inc (MOV) designs, manufactures, retails, and distributes watches, as well as jewelry, tabletop, and accessory products. Its brands include Movado, Hugo Boss, Lacoste, Ferrari, Coach, and Tommy Hilfiger. There was no significant company news last week. MOV is a 0.4% holding in the North Star Micro Cap Fund.

+12.5% Q.E.P. Co Inc (QEPC) manufactures, markets, and distributes tools and related products for the home improvement market. The Company’s brand names include QEP, O’Tool, and Roberts. Products include trowels, floats, tile cutters, wet saws, spacers, nippers, and pliers that are marketed for the use in surface preparation and installation of ceramic tile, carpet, marble, and drywall. There was no significant company news last week. QEPC is a 2.4% holding in the North Star Micro Cap Fund.

+14.0% SP Plus Corporation (SP) provides vehicle parking solutions. The Company offers professional parking management, ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other technology-driven mobility solutions. SP Plus serves the aviation, commercial, hospitality, healthcare, and government markets. There was no significant company news last week. SP is a 4.1% holding in the North Star Micro Cap Fund.

The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.

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